Is it a good idea to finance your business with a personal loan?

Which type of loan should you take to finance your business - a business loan or a personal loan? Before answering that question, it is important to know the difference between a business loan and a personal loan. Business loans are usually long-term secured loans that require collateral whereas personal loans are small unsecured loans that don't require any collateral/security. Business loans are for business owners with a good credit history and revenue while personal loans are for individuals with a good credit score and a steady income.

Personal Loan Vs Business Loan

Business loan applications are approved based on the company’s reputation, profit and loss report, and credit history while personal loan applications are approved based on the applicant's credit score, income status, and repayment capability. Business loans usually have certain terms and conditions for the end use of the borrowed money whereas personal loans can be used for any purpose - wedding expenditure, school admission fees, home renovation or business expenses.

When is a personal loan a good option for your business?

A low-interest rate personal loan from a reputable bank with flexible repayment options can be a good alternative to those business owners and entrepreneurs who are tied down by unique constraints such as:

If you are just starting a business, obtaining a business loan can be difficult. In such a scenario, a personal loan can come in handy, especially if it is a small business venture.

If the money required to finance your business is a small amount then a short-term personal loan is preferable to a long-term business loan. This is mainly because banks hesitate to give small business loans to customers as they yield low interest for the same cost of banking as a long-term business loan.

Most business loan applications are rejected due to insufficient collateral provided by the applicant. Instead of offering your home as collateral for a business loan, you can consider taking a personal loan that doesn't require a collateral.

Why is a personal loan a good option for your business?

Here are some valid reasons why a personal loan can be better suited to finance your business:

With the rise in competition among the lending institutions like banks and NBFCs (non-banking financial companies), the lenders opt for minimal paperwork and instant disbursal of personal loans to attract and retain customers.

Whether you are looking to expand your business or purchase an office equipment, taking a small business loan can be helpful. However, as the focus is on your business, the process of applying for and obtaining a small business loan can take considerable time and effort. Essentially, your lender has to be confident that your business can generate enough profit for you to repay the loan on time.

Personal loan is a viable option for those who don't have a business history and financial strength to show at the time of applying for a business loan.

Although taking a personal loan for a startup business sounds like a sensible plan, keep in mind that mixing business and personal financials isn't good. It is important to maintain your business and personal finances separately. Once you have started your business, focus on building good credit.

How to apply for a personal loan?

Any individual between 21 to 65 years of age with a good credit score, a steady income, and a stable occupation can apply for a personal loan at a bank. Before applying for a loan, check your personal loan eligibility on a bank website or a reliable third-party website. Too many rejections can negatively affect your credit score.

After checking the eligibility criteria, compare various personal loan offers across the top banks in order to choose the lowest-interest rate personal loan. This way, you can save up on interest. Use the free online personal loan EMI calculator to find out how much your personal loan will cost you monthly. Choose a short loan tenure so that you can repay the loan quickly.

You can choose to apply for a personal loan online to avoid lengthy paperwork and the hassle of going to a bank branch and waiting in queue to submit your application form. Depending on your eligibility, the bank will approve or reject your loan application. However, once your loan application has been processed and approved, the loan amount will be disbursed instantly to your bank account.